Why we're buying fintech companies

For the next few years, we’re going to focus on fintech. Specifically, small software companies that help Indian businesses move, record and borrow money. Here’s the reasoning.

The rails are public

Most countries built their payment systems inside private banks. India built them as public infrastructure. UPI lets anyone send money to anyone for free. Aadhaar lets a company verify a customer in minutes. The Account Aggregator framework, live since September 2021, lets a lender see a borrower’s bank statements with the borrower’s consent. And from this month, every business with more than ₹10 crore in turnover has to issue GST invoices electronically.

None of this is a product on its own. A trader in Surat doesn’t want “UPI.” They want to know which customers have paid, which haven’t, and whether they can get a loan against what they’re owed. That’s a software problem, and thousands of small companies have started working on it.

Small is fine here

These companies don’t need to become huge to be good businesses. A tool that reconciles payments for a few thousand distributors can make money for decades. Customers rarely switch, because moving your books is painful. The regulator keeps the bar high enough that casual competitors stay out.

The problem is that venture capital needs huge. A company with steady revenue and no path to ₹1,000 crore is a bad venture investment, even if it’s a good business.

Funding has stopped

For most of 2021, that didn’t matter. Money was cheap and rounds came fast. This year interest rates went up, public software stocks fell, and the funds that wrote cheques every few weeks slowed down sharply. Founders who raised at 2021 prices now can’t raise at any price they’d accept.

Regulation is also getting stricter. In September the RBI issued its digital lending guidelines. Lenders who grew on loose practices now face real compliance costs. Companies that already followed the rules don’t.

So there’s a set of companies that are useful, regulated, profitable or close to it, and stuck. Their founders have three choices: shut down, raise on bad terms, or sell. We want to be the obvious buyer when they choose to sell.

What we’ll do

We’ll buy companies that have paying customers and clean books. We’ll pay for what the business earns today, not for what it might be worth in a better market. After that we’ll decide case by case whether to hold each one, merge it with something else we own, or sell it to someone who can do more with it.

If you run one of these companies, we’d like to hear from you.

Happy Diwali.